Have banks bottomed out? Think again

After three better-than-expected bank earnings announcements, investors are beginning to act as if the worst is over for the financial crisis. But are these earnings reports based on a fundamental improvement in the business climate and the banks' strategies, or one-time events? The answer is a bit of both. There is a significant amount of one-time gimmickry in the numbers, coupled with trillions in capital and big interest rate cuts from the U.S. intended to help banks rebuild their capital.

Here are the numbers for the three banks:

JPMorgan Chase (JPM) earned $2.1 billion worth of net income, or 40 cents a share, which was eight cents a share more than analysts had expected, but down 40 percent from last year. JPMorgan took a $6 billion charge for bad loans and set aside another $4.2 billion in provision for more bad loans. The good news was profits from near zero percent interest rates and trading gains. JPM's stock is up a mere three percent so far in 2009 and it has no plans to repay its $25 billion piece of the TARP.

Goldman Sachs Group (GS) reported $1.8 billion in profits, which excluded the orphan month of December in which Goldman lost $780 million. Most of the earnings came from trading gains, while its other units were less than stellar. Its stock is up 44 percent so far in 2009 and it raised $5 billion to repay its $10 billion piece of the TARP.

Wells Fargo (WFC) made a $3 billion profit on the strength of the refinancing boom triggered by low interest rates. Its stock has tumbled 34 percent so far in 2009 and it has said that it would like to repay its $25 billion piece of the TARP but will wait for the U.S. to give it permission to do so. However, Wells' results may be a one-time event since it is likely that most of the people who could qualify for a refinancing already have done so.

Then there is the little matter of FAS 157-e, which lets banks raise the stated value of their so-called Level 3 assets -- those that don't have an active market. I calculated that the 19 financial institutions undergoing stress tests had $608 billion worth of such assets at the end of 2008.

My guess is that the number will be much higher when the first quarter 2009 results are all out. That's because FAS 157-e lets the banks value those assets however they please. While many banks will take advantage of this new rule in the current quarter -- that too may be a one-time event.

Moreover, the other shoe is starting to drop. With today's $25 billion bankruptcy filing from the second largest mall operator, General Growth Properties (GGP), many banks will be writing off their exposure to this and other commercial real estate firms likely to file for bankruptcy now that the vacancy rate in the country's 1,500 malls has hit 7.1 percent -- the highest in a decade.